Why When Brent Crude Leads, WTI Often Follows

While Brent and WTI are separate physical crude grades, their interaction as international and domestic benchmarks is fascinating.

Let's take a look at why Brent traditionally leads the way for WTI through this analysis of supply chains, geopolitics, and futures market linkages between these two market leaders.

Brent is the Global Benchmark

Produced in the North Sea, Brent crude is regarded as the top global price marker for crude oil trades. More importantly, Brent futures trade in London's Intercontinental Exchange (ICE) exchanges, providing a transparent worldwide pricing model.

Due to these global supply connections and futures liquidity, the Brent benchmark price immediately reflects any overall petroleum supply and demand shocks.

Brent responds when geopolitical events disrupt a significant producer like Libya or Venezuela. Shifts in China's oil demand also register through Brent dynamics.

As the predominant benchmark, producers and buyers around the globe routinely index their term contracts to Brent values. So, a rise or fall in the North Sea marker tends to spread through international trade pricing.

Even Middle Eastern producers like Saudi Arabia reference Brent when setting official selling prices (OSPs).

WTI Influences the US But Follows Brent

While Brent oversees international oil markets, WTI holds sway domestically within the United States. Produced in Oklahoma and Texas, WTI meets the needs of many US Gulf Coast refineries.

Its futures trade actively on Nymex in New York, providing a critical price point for regional hedgers and traders.

However, as a major global oil producer and consumer, events outside US borders still significantly impact domestic supplies and demand. When Brent adjusts higher or lower due to international dynamics like OPEC cuts, US refiners must compete in this globalized marketplace.

Brent's integrated spot and futures structure efficiently signals trades in both physical and paper markets.

As such, WTI typically tags along as Brent provides the dominant worldwide pricing signals. When production issues or geopolitics move Brent values, US consumers and businesses feel resultant effects through gasoline costs and feedstock pricing, respectively.

Reflecting these overlapping supply linkages, Brent and WTI prices correlate around 90% historically.

Price Differentials Emerge at Times

Market forces unique to the US or transportation constraints have occasionally caused temporary WTI-Brent differentials. For example:

2018 Transport Bottlenecks: The rapid increase in oil production in the Permian basin has resulted in a significant surplus of crude oil, which has exceeded the capacity of pipelines to transport it.

As a result, the price of West Texas Intermediate (WTI), which is landlocked, has decreased significantly compared to Brent crude oil.

2020 Pandemic Period: The recent steep decline in driving activity in the United States has led to a significant drop in the price of WTI crude oil compared to Brent crude oil.

This deviation from the usual trend can be attributed to the temporary shock in demand caused by the ongoing pandemic and the resulting economic slowdown.

Strategic Reserve Releases: In an effort to reduce fuel costs in the United States, coordinated stockpile draws were implemented, resulting in a temporary separation of the benchmarks.

This decision was made to alleviate the pressure on the fuel market and stabilize prices. The coordinated draws successfully achieved the desired outcome, and the benchmarks were reunited.

However, these divergences proved short-lived as infrastructure or demand normalized. Over the long run, Brent's leadership in setting global supply/demand tenors pulls WTI prices back in line.

Despite occasional regional factors, their close 90% correlation reflects this dominant underlying linkage.

Expand your knowledge with this write-up: How Crude Oil and Currencies Correlate

Futures Markets Tie Them Closer

Active global oil futures trading further enhances the Brent-WTI relationship. Although physically settled in different regions, these contracts trade virtually side-by-side. Brent and WTI futures price fluctuations continuously spill over between Nymex and ICE exchanges.

Speculators, producers, and refiners routinely view both benchmarks when implementing hedging strategies or making spot purchase decisions.

Their integrated presence on screen creates a natural tendency to converge towards each other based on consistent fundamentals rather than temporary local effects.

Additionally, Brent futures see heavier institutional participation from large investment funds than less liquid WTI. When these players move in or out of long/short positions, it exerts spill-over influence, dragging WTI values along systemically due to prevailing macro sentiment or technical cues.

Check out this suggested article: How Shale Oil Production Affects WTI Prices

Geopolitics Can Disconnect Them Temporarily

Of course, a severe supply disruption impacting either Brent specifically or US production could temporarily override the normal price linkage. For example:

In the event of a NATO-Russia conflict that would reduce North Sea or Russian output, Brent crude oil prices may experience a disproportionate increase until the global Organization of the Petroleum Exporting Countries (OPEC) responds.

If North Sea or Russian oil production is disrupted due to a military conflict, it could lead to a shortage of oil supply, causing prices to rise.

The impact of such an event on the global oil market would depend on the duration and severity of the conflict, as well as the ability of other oil-producing countries to increase their output to compensate for any supply shortages.

A hurricane destroying Gulf Coast infrastructure like refineries or pipelines could plunge WTI below Brent until damage repairsNormalize regional inventories.

However, history shows even major shocks usually fail to sever the Brent-WTI relationship for a long time. As flexible global trade patterns and arbitrage cargoes help balance any imbalances, their fundamentals-driven correlation asserts itself over time.

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In Conclusion

Brent and WTI are the two most widely used benchmarks for crude oil prices worldwide and in the US. They tend to rise and fall together about 90% of the time because the same supply and demand factors drive them.

Brent represents the global weighted average cost, while WTI reflects these international signals domestically.

Futures market integration and overlapping physical trade flows enhance their systematic relationship. Short-lived infrastructure issues or localized shocks create temporary differentials between these two bellwethers before regular market forces pull them back in sync.

Overall, Brent's leadership keeps WTI moving closely with broader crude oil market trends.

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